Long-Term Care Insurance

Alternatives to Buying Long-Term Care Insurance

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Alternatives to Buying Long-Term Care Insurance

Buying long-term care insurance is one way to plan financially for a time when you might need to pay for help to take care of yourself. But it’s not the only way to pay for in-home care, adult day care, assisted living or a nursing home.

Before you buy a policy, it’s a good idea to explore alternatives.

A quick refresher

Long-term care refers to a host of services to help with “activities of daily living,” such as bathing, eating and remembering to take medication. Regular health insurance and Medicare pay for medical expenses. But they don’t pay for custodial care, which is the nonmedical help with routine activities. Medicaid, the federal and state health insurance program for low-income people, pays for nursing home care. But you have to spend most of your money first before you qualify.

Planning is vital once you reach your 50s and 60s, because long-term care is expensive. Among 65-year-olds, 52 percent will eventually develop a disability and require long-term care services, according to a study by the Urban Institute and the U.S. Department of Health and Human Services. Of those who require long-term care, men will need services for an average of 1.5 years, and women will need them for an average of 2.5 years.

A long-term care insurance policy pays for care up to the policy’s limits if you have a severe cognitive impairment, such as dementia, or you can’t do two out of six activities of daily living. Those are:

Bathing.

Caring for incontinence.

Dressing.

Eating.

Toileting (getting on or off the toilet).

Transferring (getting in or out of a bed or a chair).

Most policies sold today pay for care in a nursing home, assisted living facility or adult day care center or at home.

But some buyers are wary about shelling out a lot of money for coverage they may never use. And there is no guarantee that your annual policy price won’t increase in the future. In the past decade, many long-term care insurance policyholders have been hit with big price hikes.

Here are alternatives to buying a long-term care insurance policy.

Save money for long-term care

If you have robust savings, you could plan to pay for long-term care out of pocket.

Pro: You don’t risk paying for insurance that you may never use.

Con: A few years of care could put a big dent in your savings, leaving less money for your heirs. You could also run out of money. In that case, you could apply for coverage through Medicaid, which would pay for nursing home care. But then your options would be limited to facilities that accept Medicaid patients. And the program doesn’t pay for assisted living in every state.

Tap into ‘living benefits’ on a life insurance policy

This feature is sometimes called “accelerated death benefits” and is available on most permanent life insurance policies such as whole life insurance. It lets you take a portion of the life insurance payout while you’re still alive to pay for medical expenses, including long-term care. The death benefit is reduced by the amount used for long-term care.

Pro: The cost is included in your rates on some life insurance policies, and you can add it for a small cost on others when you buy.

Con: The triggers for when you can access the benefits for care vary by company, so read the fine print carefully. A trigger could be diagnosis of a terminal illness. Also, using the policy for long-term care reduces the payout your beneficiaries will get.

Sell your life insurance policy

You can sell your permanent life insurance policy and use the proceeds for anything you want, including long-term care expenses.

Pro: The proceeds you get from selling your policy, a transaction called a life settlement or viatical settlement, are usually more than what you’d get if you surrendered the policy for the cash value.

Con: The proceeds may be taxed, and your survivors will no longer get a death benefit from the policy. (When you die, the death benefit will go to the new owner of your policy.) It can be tough to tell if you’re getting a fair price. Life settlements generally aren’t available for term life insurance policies.

Use an annuity

You can buy an immediate annuity to provide a steady stream of income to pay for long-term care. With an immediate annuity, you pay a one-time lump sum and the insurer provides a guaranteed stream of income for a certain period or the rest of your life. The amount you receive depends on how much you paid in and your age, health and gender.

Pro: You can buy an immediate annuity even if you’re in poor health. In fact, you can qualify for a higher annual payout from the annuity if you’re in poor health than if you’re in good health.

Con: You need a large sum of cash to invest, such as $50,000 or more. The income from the annuity still might not be enough to pay for your care. The tax implications for annuities are complex, so you’ll want to talk with a tax advisor to understand the future tax bills.

Buy a combination long-term care/life insurance policy

These policies, also called asset-based or hybrid life insurance and long-term care insurance policies, provide a pot of money for long-term care if you need it or a death benefit to your beneficiary if you don’t max out the long-term care benefits. Typically you pay one large premium upfront, such as $75,000, or a few large payments over a few years. Under some policies, such as the Lincoln MoneyGuard II from Lincoln Financial, you can get your money back if you decide years later you don’t want the policy.

Pro: You get something for your money even if you never use the long-term care portion of the policy. If you don’t use it for long-term care, or don’t use all of it, your beneficiary gets a life insurance payout when you die.

Con: It’s an option only if you have a large sum of money to spend.

Buy a short-term care insurance policy

Short-term care insurance covers the same types of care as long-term care policies, but for a shorter period of time — three months to 360 days. You choose the period when you buy. Generally, short-term care insurance has no “elimination period,” or waiting period, so the policy starts paying out as soon as you start using care. The elimination period on a long-term care policy works like a deductible: It’s the number of days you pay for care before the policy pays out. A typical elimination period is 90 days.

Short-term vs. long-term care insurance

Short-term care insurance

Long-term care insurance

Lower in price

✓

No deductible

✓

Easy to qualify for coverage

✓

Can provide coverage for more than one year

✓

Must meet tougher consumer protection standards set by states

✓

Pro: A short-term care insurance policy costs less than a long-term care policy and is easier to qualify for. Although the coverage lasts less than a year, that might be all you need. You can also buy a short-term care insurance policy to pay for care during the elimination period of a long-term care insurance policy.

Con: A short-term care insurance policy won’t provide enough coverage if you need care for more than a year. It might make more sense to save money for several months of care than to pay year after year for a short-term care policy. In addition, states don’t regulate short-term care policies as tightly as they regulate long-term care policies, so they’re not held to the same consumer protection standards. That means you need to be extra careful when buying. For example, long-term care policies must be “guaranteed renewable,” which means the policy renews year after year as long as you continue to pay for it. Many short-term care policies are guaranteed renewable, but they’re not required to offer that protection. In a review of policies on the market, consumer advocates found at least one that did not guarantee renewal. Under that policy, the insurer could refuse to renew coverage, even after you’d paid years for it and had never made a claim.

Get help charting the right course

Financially planning for long-term care is tricky. Before you buy any insurance, talk to a trusted financial advisor to help you plan for long-term care expenses. A fee-only advisor doesn’t earn commissions on product sales and can help you look objectively at the big picture.

Long-Term Care Insurance

Ordering the Combo: Life Insurance with Long-Term Care Benefits

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Ordering the Combo: Life Insurance with Long-Term Care Benefits

The biggest risk of buying long-term care insurance is that you might spend tens of thousands of dollars on something you won’t use. Policies pay for nursing homes, assisted living or home health care — but what if you never need these services? New types of policies combine long-term care insurance with permanent life insurance, such as whole or universal life.

If you want both types of coverage and can front the money, these hybrid options are worth a look.

How combination policies work

Combination long-term care/life insurance policies pay for long-term care that regular health insurance or Medicare won’t cover. And if you don’t max out the long-term care benefits, the insurer pays a benefit to your beneficiary upon your death.

Also called linked or asset-based policies, combination products work this way:

Depending on the policy, you pay one lump-sum premium or a few large annual premiums — typically for fewer than 10 years, according to LIMRA, an industry research and consulting group. The average cost of a single-premium combination policy is $75,000, according to the American Association of Long-Term Care Insurance.

The policy provides a pot of money for long-term care that’s equal to several times your premium payments.

The policy’s death benefit will be reduced — which means less money for your beneficiary — according to how much of the long-term care benefit you use. Some policies guarantee a small percentage of the full death benefit, such as 10%, even if you use all the money allocated for long-term care.

You’ll need to supply medical records and take a medical exam to qualify for some combination policies. Others offer “simplified underwriting,” which means you may only need to answer health questions over the phone. If you’re healthy, you’ll pay less for coverage if you buy a policy that requires both an exam and submission of medical records.

Combination policies differ, but here’s a hypothetical example for a MoneyGuard II policy from Lincoln Financial: A 60-year-old female nonsmoker pays a single $100,000 premium for up to $453,783 in long-term care benefits, or almost 4.5 times the premium. Long-term care benefits could pay out for up to six years, at up to $6,303 per month. If she never used the policy for long-term care, it would pay a death benefit of $151,261 to her beneficiary. And after year five, she could get her $100,000 back if she didn’t want the policy any longer and hadn’t used any of the long-term care benefits.

Sales of combination long-term care/life insurance policies have taken off. More than 260,000 combination policies were sold in 2017, up from 15,000 policies sold in 2007, according to LIMRA.

The appeal of combination policies

Aside from the fact that you get something for your premium no matter what, the biggest advantages of combination policies are:

The policy can be a good investment if you otherwise would have spent the money or kept it in a low-yield account.

You won’t have premium hikes when you pay with a lump sum, and a policy with a limited number of payments might even guarantee the premiums will stay the same. Some owners of traditional long-term care insurance policies have seen their premiums double within the past several years as care costs have surpassed insurance companies’ projections. And with historically low interest rates, insurers haven’t made enough investment income off of premiums to pay claims.

There’s a money-back guarantee with some combination policies. The insurance company will return your premium if you decide you don’t want the policy after a certain period of time, such as five years. Before then, you can get a percentage of the premium back.

The downsides

A combination long-term care/life insurance policy is probably not for you if:

You only need life insurance. In that case, you should buy a regular term or permanent life insurance policy. Term life, designed to cover the years that your family depends on your income, is sufficient for most people. Permanent life insurance covers you for your whole life.

You don’t want permanent life insurance. If you only need temporary coverage, shop for term life insurance, which is much cheaper.

You don’t have $75,000 (or more) burning a hole in your pocket. The American Association for Long Term Care Insurance says that combination policies are best for people who have “lazy money” sitting in CDs or money market accounts.

Get advice before you decide

If you do decide on a combination policy, compare quotes from multiple insurers, and check the insurance companies’ financial strength ratings before you buy. It only takes a few minutes to look them up on the websites of independent rating firms, such as A.M. Best, Fitch Ratings, Moody’s Investor Services or Standard & Poor’s Ratings Services. (You might have to register on some sites to access ratings, but registration is free.) The ratings agencies issue grades for insurance companies, and each agency has its own scale.

Combination policies are complex products, and their costs and benefits vary. Before you buy, talk with a financial advisor who understands these products and can compare them to stand-alone long-term care and life insurance options.

Long-Term Care Insurance

5 Insider Tips for Finding Affordable Long-Term Care Insurance

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Yet faced with the coverage costs, many long-term care insurance shoppers get sticker shock and give up. Here’s how to keep the price affordable.

1. Buy sooner rather than later

“The key to long-term care insurance is to apply early while it’s inexpensive,” says Kevin M. Lynch, assistant professor of insurance at the American College of Financial Services in Bryn Mawr, Pennsylvania.

You can buy long-term care insurance up to age 75 from most companies, but you’ll pay more at older ages and if you have health conditions.

Among 65-year-old applicants, 28% will be denied because of their health, Lynch says.

The ideal age to start shopping? “I think 50 is the magic number,” says Deb Newman, president of Newman Long Term Care, an independent insurance agency in Richfield, Minnesota.

Don’t give up if you’ve passed the half-century mark. Apply at least 60 days before your next birthday to get a price based on your current age, advises Jesse Slome, executive director of the American Association of Long-Term Care Insurance.

2. Work with an independent agent

Prices vary by insurer for the same amount of coverage. Work with an agent who can sell — not just quote — policies from different carriers, Slome says. A good agent will know which companies will likely accept you for coverage based on your health and give you the lowest price.

Get price comparisons even if you’re offered the opportunity to buy long-term care insurance through a group, such as your employer. If you’re healthy, you might find a better deal on your own.

3. Start with a budget

Decide what you’re comfortable spending for coverage, and ask the insurance agent for quotes that fit your budget, advises Brian Gordon, president of Maga Ltd., an independent long-term care insurance agency in Riverwoods, Illinois. Gordon discourages people from buying a policy if they’ll struggle to pay the premium.

Work with a financial advisor to review other options if you can’t qualify or pay for long-term care insurance. Medicaid, the federal and state insurance program for people with low incomes, will pay for nursing home care, but to qualify, you have to spend down most of your money first.

4. Plan realistically

Among 65-year-old Americans, 52% eventually will develop a disability and will need long-term care services, according to a study revised in 2016 by the Urban Institute and the U.S. Department of Health and Human Services. On average, a 65-year-old today will eventually incur $138,000 of long-term care costs.

But few folks want to think about that.

“First of all what pops into people’s minds is the dreaded nursing home,” Newman says. Yet most long-term care is provided at home, according to the U.S. Department of Health and Human Services.

Newman encourages clients to buy enough coverage to pay for home health care for a few years. The average annual cost of a full-time home health aide is $50,336, compared with $89,297 for a semi-private nursing home room, according to the Genworth 2018 Cost of Care Survey.

Most long-term care insurance policies reimburse you for care at home or in assisted living or a nursing home. So if you buy enough to pay for home health care but instead go to a nursing home, the policy will pay at least some of the nursing home costs.

Look at costs of care in your area to estimate how much coverage to buy, Lynch advises.

5. Go for a simple vs. souped-up policy

Ask for quotes for good, better and best coverage from each company to see costs at different levels, Slome says.

Avoid adding features, called riders, that you don’t need. “Keep it a good, simple, long-term care policy without all the bells and whistles,” Gordon says.

An example is a “restoration of benefits” rider: If you need long-term care but then get better, the benefits you used are restored for a later date. But Gordon says once people start to need long-term care, they usually continue to need it.

An inflation protection rider allows your benefits to grow to keep up with inflation. Reducing the inflation protection, from, say, 3% to 1% will drop the policy price. If you’re older, say 70 instead of 55, you may be able to get by with less inflation protection, Lynch says.

Long-Term Care Insurance

Long-Term Care Insurance Policy Owners Hammered by Rate Increases

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Long-Term Care Insurance Policy Owners Hammered by Rate Increases

If you bought long-term care insurance at middle age and have moved into the golden years, you’ve probably been hit with a rate increase or perhaps are bracing for one.

Most long-term care insurance carriers have hiked rates on at least some older policies in the past decade, and the hits keep on coming:

In Florida, MetLife is proposing long-term care insurance rate hikes of 20 to 95%, and Unum is proposing increases of up to 114% on some of its older policies. The proposals are pending before the Florida Office of Insurance Regulation.

Four carriers — Genworth, MetLife, John Hancock and Unum — got approval to impose double-digit rate increases on older policies in Pennsylvania this year. Most of the approved rate hikes ranged from 15% to 30%. Unum got approval for four annual 13% and 18% increases, which will compound to 63% and 94% over four years.

The federal government announced in August that rates on most of the long-term care insurance policies for federal employees and retirees would increase by an average of 83% starting Nov. 1. The Federal Long-Term Care Insurance Program is insured by John Hancock Life and Health Insurance Co.

Long-term care insurance helps pay for nonmedical care when you can’t live independently because of a disability or condition such as Alzheimer’s disease.

The rate hikes have caught many policyholders by surprise. A rate increase is never welcome news. But understanding the reasons for rate hikes and your choices can help you move forward.

Why and how this is happening

Rate hikes on existing long-term care insurance policies aren’t due to your increasing age or deteriorating health. They’re happening because insurance companies based their original prices on faulty projections.

“Most policies [subject to rate hikes] were bought eight to 15 years ago, when the premiums really were underpriced,” says Brian Gordon, president of Maga Ltd., an independent long-term care insurance agency in Riverwoods, Illinois.

Insurers assumed a certain portion of people would let their policies lapse without ever using them. But more buyers than expected held onto their policies and then — surprise! — made claims. As a result, the cost of claims is higher than insurers anticipated.

Low interest rates since the 2008 recession also hit the industry hard. Insurers make money by investing the premiums you pay. With interest rates low, investment yields are disappointing.

Insurers can’t just raise rates whenever they want. They must get approval from state insurance regulators. In some cases, regulators are approving smaller rate increases than what insurers requested. In Pennsylvania, for example, MetLife asked for rate increases ranging from 43% to 60% on some policies, but got approval in April for a 20% increase. Regulators approve increases to ensure that insurers can pay future claims.

“None of us want a rate increase, but we want to make sure the carriers remain viable,” says Rayette Law Newman, who heads policyholder services at Newman Long Term Care, an independent insurance agency in Richfield, Minnesota.

Your choices if you face a rate hike

If a letter arrives notifying you of a rate increase, take a breath. If you can afford the increase, Law Newman says, “we always recommend maintaining the policy as it is.”

Generally carriers will let you decrease the premium by reducing your coverage. (The specifics vary by insurer and by policy.) If the rate hike will wreck your budget, here are some of the ways you might be able to reduce the coverage in exchange for a lower rate increase. The choices will depend on the policy and the insurer:

Increase the elimination period: That’s the number of days you pay for care before the policy starts paying. It functions like a deductible, so the longer the elimination period, the more you pay out of pocket.

Decrease inflation protection: This is the percentage that your benefits increase each year to prevent inflation from eating into them. Before you choose this option, make sure you understand whether the decrease is retroactive to the day the policy was issued, or if it begins when the premium increase is scheduled to take effect, Law Newman says.

Decrease the daily benefit amount: This is the maximum amount the policy will pay for care per day.

Decrease the benefit period: This is the number of years the policy will pay for long-term care.

Choose carefully, because once you reduce benefits, you can’t increase them, Law Newman says.

Some carriers also offer an option to stop paying premiums and receive long-term care coverage that’s equal to the amount you’ve already paid in. So if you’ve paid $2,500 a year for 10 years on a policy, you’d have long-term care benefits equal to $25,000.

Law Newman says she generally doesn’t recommend that option because it will leave the policyholder with little coverage.

A word of caution if you think you can shop for another policy and find a better deal: A new policy will cost more because you’re older, and new policies generally are priced higher than those sold years ago.

Responding to a rate hike

There is no single solution to a rate increase that’s right for everybody, says Kevin Driscoll, vice president of advisory services at Navy Federal Financial Group in Vienna, Virginia. He recently worked with policyholders facing rate hikes in the federal government’s long-term care insurance program.

Besides the financial aspects, there are emotional considerations, he says. “Not wanting to be a burden to children — that is the underlying theme I hear from clients,” he adds. Both must be addressed before you can make an educated decision.

Walk through the choices with the agent who sold you the policy, and think through your coverage needs as you did when you purchased long-term care insurance.

It’s a kicker

“This is a kicker. It really is,” says a 78-year-old widow and retired teacher in Waldwick, New Jersey (who didn’t want her name used). She learned recently she faces an increase on her long-term care insurance policy that will amount to about $1,000 over three years. “I’m on a fixed income.”

She chose to pay the premium increase and keep her benefits as is. “I don’t want to lose any of the benefits I chose when I was 62,” she says. If she needs care, she adds, she doesn’t want to be a financial burden to her daughter and son-in-law. “They just sent their two kids to college. I don’t want them to have to pay to take care of me.”

Five years ago, Nate Narrance of Colbert, Washington, faced a 50% increase on long-term care insurance for him and his wife. The couple chose to reduce their coverage from six years of benefits apiece to three. Their combined premium rose by $100, but the change allowed them to avoid a $2,000-a-year increase. Narrance, now 79, says he’s glad they bought a lot of coverage 18 years ago so they had room to cut back on benefits and still feel comfortable.

For buyers of new long-term care policies

When you buy a long-term care insurance policy, there is no guarantee that the premium will stay the same forever. However, today’s policies are priced more accurately, says Kevin M. Lynch, a faculty instructor at the American College of Financial Services in Bryn Mawr, Pennsylvania. Insurers now have more information about the actual costs of claims, and they’ve adjusted their projections and pricing accordingly.

Yet both Gordon and Driscoll still advise clients shopping for new long-term care insurance policies to budget for future rate increases.

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